Clarification on Applying the Vacant Unit Rule at Mixed-Income Sites

Q I have a mixed-income site. The last issue of the Insider seemed to indicate that credit may be claimed on vacant units if reasonable attempts are being made to rent the unit and no units are rented to non-qualified households while the unit is vacant (see How to Make Sure Next Available Units Are Technically “Available”). Can vacant market units be rented even if there are vacant LIHTC units? And what are considered reasonable attempts to rent a vacant unit to comply with the vacant unit rule?

A Yes, vacant market units may be rented even if there are vacant LIHTC units, so long as reasonable attempts are being made to rent the tax credit units. Special thanks to tax credit consultant A.J. Johnson for clarifying this oversight. In Revenue Ruling 2004-82, Question and Answer #9, the IRS made it clear that as long as reasonable attempts are being made to rent the vacant low-income units, vacant market units may be rented.

In this example, 10 units previously occupied by income-qualified tenants in a 200-unit mixed-use housing project are vacant. And none of the low-income units in the project had been over-income units. The owner displayed a banner and for-rent signs at the entrance to the site, placed classified advertisements in two local newspapers, and contacted prospective low-income tenants on a waiting list for the project and on a local public housing authority list of Section 8 voucher holders about the low-income unit vacancies. These are customary methods of advertising apartment vacancies in the area of the project for identifying prospective tenants.

Subsequent to the low-income unit vacancies, a market-rate unit of comparable size to the low-income units became vacant. According to the revenue ruling, the owner won’t violate the vacant unit rule if the owner rents the market-rate unit before any of the low-income units because the owner made reasonable attempts to rent the vacant low-income units to income-qualified tenants.

“Reasonable attempts” depend on specific market conditions in which your site is located. You may want to check with your state allocating agency to determine how it interprets this requirement. The revenue ruling states, “what constitutes reasonable attempts to rent a vacant unit is based on facts and circumstances, and may differ from project to project depending on factors such as the size and location of the project, tenant turnover rates, and market conditions. Also, the different advertising methods that are accessible to owners and prospective tenants would affect what is considered reasonable.”